Genesco Inc (GCO) 2013 Q2 法說會逐字稿

Good day and welcome to the Genesco second-quarter fiscal year 2013 conference call.

Just as a reminder, today's call is being recorded.

Participants in the call expect to make forward-looking statements that reflect the participants' expectations as of today, but actual results could be different.

Genesco refers you to this morning's earnings release and to the Company's SEC filings, including the most recent 10-Q filing, for some of the factors that could cause differences from the expectations reflected in the forward-looking statements made during the call today.

Participants also expect to refer to certain adjusted financial measures during the call.

All non-GAAP financial measures referred to in the prepared remarks are reconciled to their GAAP counterparts in the attachments to this morning's press release and in schedules available on the Company's homepage under Investor Relations.

I would now like to turn the call over to Mr. Bob Dennis, Chairman, President and Chief Executive Officer.

Please go ahead, sir.

Good morning and thank you for being with us today.

With me today is Jim Gulmi, our Chief Financial Officer.

As a reminder, Jim's detailed review of the quarterly financials has been posted to our website along with the press release from earlier this morning.

I will begin the call today with a few remarks about the second quarter and then I will turn the call over to Jim for a review of the numbers.

Then I will return to provide some color on our operating segments before we open the call up for your questions.

Our results for the second-quarter were ahead of expectations with adjusted earnings per share of $0.50 compared with $0.22 last year.

This strong performance reflects solid expense leverage on a 4% comp gain which came on top of a 14% increase a year ago.

We believe our Journeys and Lids merchandise was well-positioned for back-to-school as evidenced by a 9% increase in overall August comps for Genesco.

To be fair, the August comp reflects some favorable comparisons against Hurricane Irene which hurt sales for several days last year.

But even taking that into account, our customer seems to want what we are offering for the fall and results at Journeys, and Schuh in particular, were very strong even after accounting for the weather.

And you are all familiar with the retail axiom; the strong back-to-school usually means our merchandise mix is in good shape for holiday in our teen focus businesses with boots in our Journeys and Schuh businesses being the biggest difference in the seasonal assortment.

While we are obviously pleased and encouraged by the strong start to the quarter, we are continuing to base our guidance for the balance of the year on more modest comp assumptions given tough comparisons to a very strong second half last year and uncertainty in the economy.

As we note in the press release, we have raised our full year guidance to a range of $4.88 to $5, up from the previous range of $4.70 to $4.82.

Jim will cover our guidance in more detail in his part of the call.

During the quarter we were active in buying our stock, purchasing about 346,000 shares at a total cost of just under $21 million or about $60 per share.

As you will have seen in the earnings release, our Board has put in place a new repurchase authorization of $75 million which replaces the balance left on our old optimization.

These recent purchases and the new repurchase authorization reflect our confidence in the strength of our business and in our prospects for growth, which I will touch on later in the call.

But first I will turn the call over to Jim for a brief review of our numbers.

Thank you, Bob.

Much of the detailed financial information for the quarter has been posted online, so I will only be making a few brief comments.

As Bob pointed out, second-quarter overall performance exceeded our expectations.

Comp sales were up 4% for the quarter, this compares with 14% comp in the second quarter of last year.

The Journeys Group had a 6% comp increase on top of a 15% increase last year.

Comps in both periods for the Journeys Group have been adjusted to reflect the integration of 133 Underground by Journeys stores.

Comps for Schuh, our UK business, are now included in our total comp sales as of July 2012.

Comps were 9% for Schuh for the month of July.

The Lids group had a 2% comp increase on top of a 12% increase last year and Johnston & Murphy had a 2% comp increase on top of a 17% increase last year in the second quarter.

I remind you that these comp sales do not include our direct business, that is eCommerce and catalog sales.

Genesco's overall direct business increased 29% in the quarter due in large part to the incremental addition of Schuh's eCommerce sales in the first part of the quarter.

Excluding Schuh direct sales increased 2% in the quarter.

August same-store sales for Genesco overall increased 9% and direct sales increased 8% on a comparable basis.

Consolidated net sales for the quarter were $544 million, an increase of 15% over last year.

This includes sales of $81 million for the quarter from Schuh which was acquired in June of last year.

Schuh sales for the partial quarter it was owned by Genesco last year were $34 million.

Excluding Schuh in both years Genesco's sales increased 6% in the second quarter.

We earned $0.50 per share in the quarter, adjusted as shown on the attachment to our press release, compared to last year's adjusted earnings per share of $0.22.

Gross margin in the quarter was 50.5% compared with last year's gross margin of 50.4%.

Adjusting for all the items broken out in the press release we were able to leverage expenses by 160 basis points in the quarter.

Adjusted expense as a percentage of sales improved to 46.7% this year compared with 48.3% last year.

The strong leveraging of expenses was primarily driven by rent and selling salaries.

Expenses also included $0.08 per share of additional contingent Schuh acquisition bonus accruals versus last year's second quarter related to their better-than-expected operating performance.

Just to remind you, this is a onetime payment built into the acquisition agreement payable in FY'16 that is contingent on Schuh's performance during the first four years of our ownership.

For the quarter adjusted operating income more than doubled, increasing to $20.3 million or 3.7% of sales compared with $9.8 million or 2.1% of sales last year.

We ended the quarter with $47 million in cash compared with $36 million last year and with $100 million in debt compared with $165 million last year.

This debt includes $29 million of the UK debt assumed in connection with the Schuh acquisition and normal seasonal borrowings to finance working capital requirements.

Since the June 2011 acquisition we have paid down $18 million of the UK debt.

In addition, we spent about $21 million in the second quarter purchasing approximately 346,000 shares of our stock at an average price of about $60.

As Bob mentioned, the Board has recently put in place a new $75 million stock repurchase authorization.

Inventories were up 17% year over year compared with a sales increase in the second quarter of 15%.

We continue to feel good about our overall inventory levels.

For the quarter capital expenditures were $18.4 million and depreciation was $14.4 million.

This compares with $13.6 million and $13 million respectively last year.

Now I would like to spend a few minutes on our guidance for FY'13.

Based on our strong second-quarter we are raising our full-year outlook.

We now expect adjusted EPS to be in the range of $4.88 to $5, an increase from our previous range of $4.70 to $4.82.

Using the high end of our new range this represents a 22% increase over last year.

This is on top of a 65% increase in EPS last year and a 33% increase the previous year.

This new full-year guidance reflects the entire upside from the second quarter versus our projection which was $0.05 higher than consensus estimate.

To be clear, our EPS assumptions for the back half of the year have not changed.

We are flowing through $0.18 to our previous fiscal 2013 guidance range, or the amount by which we exceeded our second-quarter projection.

In looking at the consensus EPS estimates I just add that the third quarter continues to be a little high.

Consistent with previous years this guidance does not include about $1.5 million to $2.5 million pre-tax or $0.04 to $0.06 per share after tax in expected non-cash impairments.

This amount compares with last year's non-cash impairments, other legal matters and network intrusion expenses of $2.7 million pre-tax, or about $0.07 per share after tax.

In addition, we will continue to exclude the amortization of the Schuh deferred purchase price from our EPS guidance.

The deferred purchase price amount in FY'13 is expected to be approximately $12 million or $0.49 per share for the full year.

The guidance does include the full year accrual for the contingent bonus built into the acquisition agreement which we currently expect to be approximately $15.1 million or $0.47 per share.

The following are assumptions we use to develop this guidance.

First, we are assuming a comp increase of about 2% to 3% for the last two quarters.

The assumed comp increase for the full year including the 7% increase for the first half will be in the 4% range.

As Bob mentioned, we are off to a good start with August comps up 9%, but we are obviously not banking on sustaining that level for the third quarter or the balance of the year.

We are also assuming an overall sales increase of about 13% to 14% for the year.

Adjusting for the Schuh acquisition by excluding sales for the entirety of fiscal 2013 and fiscal 2012 Genesco sales are expected to increase about 7% to 8% for the year.

In case this year's addition of Schuh sales and the 53rd week in the fourth quarter may cause some confusion about the quarterly distribution of our annual sales, I'm going to give more detail than I normally would about how we see sales in the remaining two quarters of the year.

Our current planning continues to assume approximately 23% to 25% of the sales will be in the third quarter and approximately 30% to 32% in the fourth quarter.

Our guidance assumes a gross margin percent of sales about flat with last year and positive expense leverage of about 60 basis points.

This results in operating income improvement of about 60 basis points to 7.6%.

The tax rate assumption is about 37% and the share count assumption for the full year is about 24.2 million shares.

We are also expecting capital expenditures for the year of about $92 million and depreciation will be about $59 million.

We are forecasting 116 new stores and are planning to close about 42 stores.

We expect to end the year with approximately 2,473 stores, an increase of about 4% over fiscal 2012.

We are also forecasting square footage growth of about 6% for fiscal 2013.

Now I will turn the call back to Bob.

Thanks, Jim.

Turning now to a discussion of our individual businesses; a general theme for the quarter is that we are on the same track we have been on for some time and we continue to like the track we are on.

Journeys remains the go to source of footwear and accessories for the teen customer and has enjoyed another strong quarter driven by favorable fashion trends in teen footwear.

ASPs in the Journeys stores were up 8% in the quarter, reflecting the cost increases from our suppliers we have been talking about for several quarters.

ASP should be a positive factor in the third quarter as well since we anniversary most of the price increases in the fourth quarter.

We are especially pleased with the continuing strong performance in Journeys Kidz and Shi by Journeys where comps were up 16% and 12% respectively for the first half.

We have now converted 127 former Underground Station locations into Underground by Journeys stores and the plan to re-merchandise these stores fully in time for the holiday selling season is proceeding on schedule.

As we mentioned, Journeys' assortment really resonated with teens for back-to-school.

August comes for the Journeys Group were up 11%.

Turning to Schuh, despite a challenging economic environment in the UK markets, the business has continued to perform above expectations driven by essentially the same fashion trends that Journeys is seeing.

Schuh's August comps were up 14% following a very strong August last year.

As we have said before, one of the benefits of the economic slowdown in the UK has been the increased availability of attractive retail locations.

The Schuh team opened four new stores during the second quarter and remain on schedule to open a total of 17 stores this year.

Now remember that the average Schuh store sales are roughly four times the average Journeys store, so 17 new stores represents significant growth for us.

And also worth noting here, opening 17 stores on a base of 64 since the beginning of the year for a 22% increase in square footage, while at the same time generating very attractive comps in the current environment is quite an achievement for the Schuh team and we congratulate them for it.

The Lids group sales, operating income and operating margin all increased in the quarter compared to last year even though comps decelerated somewhat.

The Snapback style remained the best-selling fashion item in the quarter, but, as we predicted, the trend is maturing and distribution is broadening.

The Group's August comps were up 2%.

As football season begins we anticipate that the New Era NFL headwear should perform well as a category in part because of higher ASPs, which will be up about 35% over last year's prices for the NFL sideline hat.

So far NFL sales have been fashion driven and have borrowed some demand from other fashion categories.

As you would expect, the football fan doesn't really enter the market until the regular season gets underway, so we are hopeful that we will see incremental fan driven volume beginning in September.

Additionally, we expect that the new Nike apparel will have a favorable effect on the 76 Lids Locker Room multi-team stores.

The growth of the Lids Locker Room multi-team and Clubhouse single team merchandise concepts is continuing, both organically and through acquisitions.

Lids Sports purchased [JA Sports], a Seattle-based retailer with eight stores and various websites in July.

During the quarter they also acquired three TigerMania stores in the LSU market, one campus design stroke which has been renamed Texas Tech Locker Room and entered into an agreement to manage the University of Florida Gators' game day and campus retail operations.

In addition, we opened one new Lids Locker Room store and three new Clubhouse stores during the quarter.

We ended the quarter with 122 broadly assorted licensed sports stores including 76 Locker Room and 46 Clubhouse stores.

Lids Ecommerce held its own for the quarter as it anniversaried the introduction of the full range of merchandise on Lids.com and a newly emerging Snapback trend which drove a 40% increase in Ecommerce sales in the second quarter last year.

Johnston & Murphy had a solid sales gain in the quarter; they continue to see a shift in demand back towards men's dress shoes.

This shift to higher priced dress product from lower-priced casual styles was reflected in a 4% increase in ASPs in the Johnston & Murphy shops.

Dress shoes are also driving Johnston & Murphy's online and wholesale businesses which were up 9% and 18% respectively in the second quarter.

And our developing women's shoe business also performed well in the quarter.

Overall comps for August were up 5% at Johnston & Murphy.

We are still on target to open 13 new Johnston & Murphy stores including six outlet stores in fiscal 2013.

Finally, our licensed brand segment enjoyed a strong sales increase and improved on an already healthy operating margin in the quarter.

Overall we are pleased with our second-quarter performance, particularly with our ability to post another solid comp in the face of a challenging comparison and a challenging overall retail environment.

We are keenly focused on continuing to manage our business conservatively while at the same time being flexible enough to take advantage of upside opportunities.

Our experienced merchants continue to adapt quickly to the pickup in relevant fashion trends and we congratulate all of our operating divisions on their continued strong performance.

We have talked before about our five-year growth plan to achieve $3.1 billion in sales and a 9% operating margin as of fiscal 2016.

We're now in the process of updating this plan for fiscal 2017 and so for this update confirms our strategic direction and reinforces our long-term prospects.

Our five-year growth plan continues to be based on four primary tenets -- first, we continue to see tremendous growth potential for our UK-based shoe business and will be executing on our accelerated store opening plan through the back half of the year.

At the end of July we operated 69 Schuh stores and we expect to finish the year with 80.

Longer term we see the potential for as many as 120 stores in Schuh's current markets.

Additionally, we are using the vantage point that Schuh provides to examine the UK and other European markets for possible growth opportunities down the road.

Second, we are capitalizing on the promising trends in the Lids Locker Room and Clubhouse businesses.

For Lids Locker Room we are opening new stores and seeking out targeted small regional acquisitions to further scale the concept and increase market penetration.

We believe that, when scaled, the economics of this business are very attractive.

On the Clubhouse side there remains significant number of markets with potential for successful single team focused retail businesses.

Third, we see attractive opportunities for further store expansion in Canada for our Lids Sports, Journeys and Johnston & Murphy businesses.

Our presence is the number one or number two brand in the US market in each of our categories could prove to be an advantage for additional international expansion.

Our success through the first year with Schuh is demonstrating that the close relationships we have with our vendors is something that can be leveraged on in international scale.

And finally, we anticipate that our eCommerce business will continue to grow long-term as we invest in integrated targeted digital and mobile marketing initiatives.

While the economic environment has been somewhat bumpy and the consumer a bit fickle in recent years, we have performed consistently well.

We start with the tremendous strategic advantage of market-leading businesses that are difficult to replicate and from this position we have continued to improve our operating margin and generate cash flow to fund our growth both organically and through acquisitions.

The fundamentals of our business remain strong.

Our strategic position and our commitment to excellence and execution continue to serve us well and we remain on track to achieve our current long-term plan and to extend our healthy trends into the future.

And operator, we will now take questions.

(Operator Instructions).

Scott Krasik, BB&T Capital Markets.

Good job; thanks for taking my question.

Bob, maybe help us understand your comment about Journeys that boots is the biggest seasonal difference.

Are you implying that boots aren't a big portion of Q3 but are of Q4?

Or are you saying that they have started out strong in Q3?

I was confused.

I'm making no comments about trends.

As you know, Scott, we don't comment on category trends or on the mix or under brands for that matter.

So what I am really commenting about is, yes, the volumes for boots are much higher for us in the fourth quarter than in the third quarter and, as such, we get a bit of an early read in the third quarter but the fourth quarter is what is important.

Now that said, we are in the business; we offer a really broad assortment to the teenager.

And so fashion keeps moving and what our merchants are really good at is moving it around as necessary.

Our record is pretty good at figuring out what we think the right mix is and reacting to the marketplace appropriately.

But as I said, we are not going to comment on what our commitment is other than to say that boots again will be a significant part of our business.

Okay, no, that was good clarification.

Then if we look at August last year, your Journeys comp was 8 and then you reported a much stronger comp for the quarter.

So was that hurricane Irene or is there something else -- is that how we should view the quarter order of magnitude for the hurricane or was there something else at play?

No, don't overplay the hurricane.

We are just calling it out because we know in -- I think it was in the last week we had more stores closed last year than we had this year obviously.

And I don't like to make a big deal of weather -- I mean look, a hurricane is about to hit now and so it goes up and down year over year.

So the thing about the rest of the quarter, and we are conservative just because we are very pleased with August, but we look forward and, as we said, it is a choppy marketplace.

And so back when there was a recession, Scott, you will remember that the pattern for us, and I think some other retailers, was we did it really well during periods where people had a real reason to buy like back-to-school and we did well at holiday.

And the softer periods for us were those sort of troughs in between event buying periods.

So we are very alert to that.

Now with that said, back-to-school for us started pretty late.

And so, we finished August with some pretty nice momentum.

So lots of things going on; we are going to remain conservative, but we are buying to preserve some opportunity to get some upside.

Okay and then just two quick ones.

The eight JAS, three LSU and one Texas Tech, because just the timing of when you bought them, do they move the needle for this year?

No.

I mean single stores don't move the needle.

We are calling those out not as much to say anything moves the needle, but to highlight the fact that we are consistently following the strategy to consolidate that space of broadly assorted licensed sport stores.

And we are doing it, as we had said before, both through acquisition and through opening new properties.

Sure, okay.

And then, Jim, I know you are not giving guidance for next year, but the $12 million in bonuses that we're excluding this year, is that a good number to think about for Schuh for next year?

Yes, that is a good number.

Thanks.

Mitch Kummetz, Robert W. Baird.

Jim, I will start with you, it's kind of the question I always ask you.

So on your outlook for the back half, 2% to 3% comp, can you just give us a little help as how we should think about that maybe by quarter, then also by concept?

Okay.

As we have said, we started in August pretty strong and the month of August is an important month for us in the quarter.

So the beginning of the month, the beginning of the quarter certainly has an impact on the third quarter.

So we are looking at around 4% in the third quarter and 1% to 2% in the fourth quarter for the overall opening.

And then if you look at the different segments of our business, Journeys is in the range of 5% to 6% in the third quarter, 1% to 2% in the fourth quarter; Schuh is in the range of 7% and the third quarter, 1% to 2% in the fourth quarter; Johnston & Murphy 3% to 4% in the third quarter, around 2% in the fourth quarter; Lids is 1% to 2% in the third quarter and 1% to 2% in the low end of that in the fourth quarter.

And as I said, around 4% for the third quarter for total Genesco and 1% to 2% for the fourth quarter.

Okay, that's helpful.

It sounds like you were prepared for that question.

No, how would I be prepared.

And then, Bob, on the Journeys business, you mentioned that ASPs were up 8% in Q2.

You said that you expect ASP to remain positive in Q3.

And then you start to anniversary some price increases in the fourth quarter.

So how do you think -- at this point as you look into the back half are ASPs not quite as strong in Q3 as Q4?

I guess it all depends on mix and how that plays out.

But how do you see comp being driven in the fourth quarter as you start to anniversary these ASP increases?

Well, you said it right.

It is hard for us to predict ASPs because mix has always been a major effect and, as you know, for many years it brought ASPs down.

And as we said, we anniversary the price increases which started to roll in in sort of October-ish and roll through the rest of the year.

That is why we are calling out the fact that we anticipate third-quarter to still have an ASP increase -- I am not going to pin it down to being the same as the last quarter, but it should still be a factor.

When we think about comp, we buy to a comp number in mind, we buy dollars not units, we are not paying attention to ASPs because we are paying attention to an overall buy budget.

And so the whole company, including the Journeys team, is being thoughtful about this economy and buying reasonably conservative.

So now that said, and we have said this before, the Journeys team has the advantage, partly because of their size, to be able to buy a little north of what that plan might be and then adjust as necessary if necessary down the road.

And they have a history of being able to make those adjustments through a range of techniques and working with our vendors.

So you heard Jim's guidance -- we are being conservative, but we are preserving a little bit of the upside with our buying patterns.

Got it.

Okay, that is helpful.

And maybe one last question for Jim.

Jim, you mentioned in your comments that on the SG&A leverage rent was one area where you saw some good leverage.

On a 2% to 3% comp over the balance of this year, how much opportunity do you see on the rent side in order to drive additional leverage in the back half of the year just kind of given where you have seen those rents go?

Well, we think that -- right now we are looking at, based on the numbers we have thrown out, that we will be able to leverage rent in the third and fourth quarters.

So the numbers do reflect continued leveraging of rent in the back half.

Okay, that is helpful.

Thanks, guys.

Good luck.

Steve Marotta, C.L. King & Associates.

Good morning, let me add my congrats on the second quarter.

Are the early back-to-school markets performing better in August than the chain averages either for Journeys or Lids?

I'm not sure what you are asking, Steve.

Well, there are some markets that are back-to-school earlier than others.

A lot of the southern states and western states are pockets of back-to-school that really start kicking in the first and second week of August, for instance, just earlier than what the nationwide average is.

Have you looked at geographic differentials within the comp in August as it relates to those back-to-school trends?

And I am just wondering if the early back-to-school markets are performing better than the average again either at Journeys or Lids or both?

You know, Steve, that is really hard to tease apart.

I don't have the numbers by region here.

The thing that we noticed is that in total back-to-school moved back a little.

And we know that there was some parts of the country where it moved, Texas was the big one, it moved back a week.

And so, that moved the needle in that part of the country.

But there is also a pattern, and it's very hard to prove this, but -- and we didn't invent this idea, but we seem to see a little bit of it -- of kids buying closer to need and in some instances even waiting with some of their budget until they get back to school so they can see what the other kids are wearing to get really confident on their purchases.

So we saw a lot of shifting around with sales moving later into the month, but there is a lot of different things going on in that pattern and I don't have the regional differences here to help you out.

Maybe later Jim can give you some color on that.

That would be cool, thank you.

Do you think that Schuh benefited from the Olympics in the second quarter?

No, it's funny, the Olympics did -- surprised a lot of people in what it did in London.

The Mayor of London had repeatedly told everyone to stay home who live in London and they did, everyone was scared of the traffic.

And so, retail in London actually suffered because the Londoners stopped shopping even though there was some tourist -- additional tourist traffic related to the Olympics.

So it was sort of a funny pattern and not quite what everyone had expected.

Okay.

Lastly, what is the benefit, a net benefit of the 53rd week to EPS -- to actually sales in EPS?

On the EPS side, if memory serves me right, I'm looking for the number, I think it is around about $0.04, okay, a share.

On the sales side I believe it's about $24 million.

That is terrific.

Thanks, guys.

34?

I'm sorry, $34 million.

$34 million.

Excellent, thank you.

Sam Poser, Sterne, Agee.

Can you talk -- in your prior guidance you hadn't had any accretion from the Underground Station consolidation.

However, you did see a really nice pop in your EBIT on the combined entity versus last year.

Can you tell us where you are there?

Well, the Underground Station consolidation is underway.

And as we have called out in the past, Sam, it was not an expense play.

So the consolidation of Underground didn't drive a reduction of expenses.

So what we are looking for is -- the result we are looking for is a comp increase in Underground stores in excess of what cannibalization might occur in Journeys stores that are in the same mall.

And are you seeing that yet?

I mean --.

Well, it is early, Sam.

We haven't even finished assorting the Underground stores.

So we are tracking it, but it is way too early to come out and comment on how it all adds up.

We are very pleased with how the Underground stores look, the landlord has fully cooperated on the re-signing.

The team upstairs did a terrific job working through the reorganization pretty seamlessly.

So it is all systems go, but we will have a lot more color on it on the next call, I would expect.

Let me just add onto that one thing, one point.

As you call out, the segment improvement in Journeys was considerable in the quarter, and certainly Underground Station by Journeys contributed to that.

But I would not in any way believe that most of it came from the improvement in Underground -- Journeys itself showed strong improvement in the quarter, Journeys by itself.

Thank you for the clarification.

A few more things.

The impact of a later back-to-school versus the impact of the hurricane, what is more important to the current trend?

I would say later back-to-school is the more important part, Sam.

There was a real late August increase and -- now part of that was driven by Texas.

But all the things I just spoke about in the earlier question about accommodation of later back-to-schools and just the buying patterns of kids possibly getting later so they have fashion assurance, there seems to be something going on that is moving sales further back in the season.

And so I would say that is the more important thing to pay attention to.

And then lastly, I don't know you don't like to talk about specific trends.

However, last year you did see 80 stores in Southern California receive a brand that will go unmentioned, that I would assume helped drive some incremental sales in the fourth quarter of last year.

Now you are lapping that.

I mean, how much of that is adjusted into your Journeys business -- on the lapping of that unnamed brand?

Because that was incremental to help -- definitely help the fourth quarter of last year, I would assume.

Sam, we've got a whole lot of different brands in our business; one brand in 80 stores doesn't move the needle enough.

We have given the guidance for the low single-digit comp for the balance of the year and that is really the relevant thing to look at at Journeys and they will sort their way into a mix that they think works for that.

All right (multiple speakers).

Is that helpful to you?

Well, sort of, yes.

And lastly -- sorry, one lastly again.

Can we assume -- I mean for a lot of the other retailers August equals about 40% of the third quarter sales.

Is that a similar number for you?

It's in the ball park, maybe a little lower.

It is probably 37%-38%, but in that range.

And then it would be -- September would be the next given its five-week month and then October?

No, ours is different, we go four, four, five.

So actually September is much lower and then we pick up in the month of August/October because it is five weeks.

October is your five week month, okay.

Right.

And also we have a little bit of wholesale business, and so we have a lot of shipments for back to school on the wholesale side of the business in October.

Christmas.

For Christmas.

Got it.

All right, thanks, guys.

Continued success.

(Operator Instructions).

Stephanie Wissink, Piper Jaffray.

Jim and Bob, it is striking to me how nicely you are leveraging your operating expenses.

And I think Mitch asked about rent relief.

But can you give us an update there?

Are the negotiations continuing and what are you forecasting, Jim, for the back half in terms of savings?

I will give just the color and then maybe Jim can give you more specifics.

First of all on rent, understand that a lot of the really low hanging fruit has been plucked.

And in many instances in the malls that we regard as the most challenged malls in the US, we went on short lease terms.

And what we are finding is in most of those when we roll over that very short lease we are preserving in general the reduction that we got.

So for a lot of the malls that we jumped on in terms of opportunity we are now preserving the position, that is the first point.

That said, as you know, other retailers continue to announce store closings.

And so, we are being very vigilant about the status of malls; we are making sure that relative to the covenants we have in our leases that we are taking full opportunity of what comes our way with the restructurings in the mall.

At the under other end of the scheme, A malls are very healthy, A malls challenge us all the time.

And so we have got that going on as well.

So the net-net is when we look at our ability to manage rent it is still so much better than it was in the last decade, but maybe not quite the reductions that we got in the last say two years.

And I will ask Jim to give you more color.

Stephanie, we are talking about rent here.

There is also some other items in the back half that allow us to leverage a little because we do expect to get some leverage in the back half.

But let's talk a minute about, as you said, rent.

We were saying about 4% comp in the third quarter and we expect to be able to get some leverage on rent in the third quarter as a result of that.

And also we should see some leveraging of our selling expenses and possibly some bonus accruals.

In the fourth quarter we are talking about 1% to 2% comp, we really are not getting much leverage in rent in the fourth quarter itself.

Even though for the back half we do get a little leverage on rent, a 1% to 2% comp in the fourth quarter is going to be hard to leverage rent, so we won't get very much, probably flat right now is what we are looking at.

[What we find] for the two quarters, we do expect to get some leverage on rent.

Now selling expenses, we do expect to get some leverage in both quarters on selling expenses.

So even with the lower, lower comp in the fourth-quarter we do expect some leverage and it won't be as much rent there as some of the other items, selling expenses and potentially bonus accruals.

Okay, that's really helpful.

Thank you.

Bob, if you could just talk a little bit about your forecast for Lids, guiding the third-quarter on a comp basis to a 1% to 2%, that is a little bit less than what I would have anticipated with what you're talking about on the NFL and the New Era product changes.

So can you give us just some sense on the conservatism there?

Yes, there is two big things going on at Lids, and the NFL is one of them and then the other one is this whole trend in Snapbacks, which for now a year and change, a year and a half or so has been a very, very strong trend for us.

And as we said on the call, it is maturing.

It is still a really, really hot category for us, but we can see the distribution pattern on it has broadened, not with our core vendor necessarily but others who are essentially imitating the trend.

So the result of that, and we have seen this happen before, is it will start to mitigate a little bit of how hot it is for us.

And that also is a pattern that usually starts to signal the end of a trend, and we are being cautious given that.

But there is a couple of things; if you look back to the best parallel to that would be when trucker hats got crazy hot.

And you will remember a brand that I don't think you can find in the market anymore called Von Dutch, which was the go-to brand.

We were in that big, we were in that really.

We did a huge business on it.

Trucker hats got overdistributed, it started to fade, and then eventually the kids moved on to the next thing.

And we are good with that because we are in that pattern and our challenge is to look at what comes next.

And the other thing that we know is the kids who were trading into Snapback hats were trading out of other categories that we have.

So our expectation is that they will trade back in.

So what we are looking at is on the one hand, we like the position of the NFL, but on the other hand we are going to stay cautious with respect to what is going on in that other sort of item-driven category, and just making sure we are being careful about it.

Last comment is on the Snapback hat, but the interesting thing about it is very -- merchants will shoot me for saying this -- an easier category to manage because it is not sized.

It is a one-size-fits-all almost by definition.

And so first, that's what allows others to get into the category a little more easily.

And at the end of the day we prefer the businesses that are hard, because our business model is built for that.

Because it is an easier category, our inventory is very well under control.

Our sales percent is much higher than our inventory percent.

So we really have no exposure to worry about on that basis.

So, long story, it is a mix of NFL and Snapback that gets us to that feeling.

Thank you.

And then just the last question is, as you look at your Journeys business, how comfortable are you with your current inventory position and then your ability to chase into trends?

Are you getting some support from your vendors in terms of kind of where we are in the footwear cycle?

Thank you.

Sure.

The Journeys team, as I said, has a terrific history of being able to be a little more aggressive with their buys.

And then should it not develop -- the business not develop to that level a combination of pushing out receipts, working on possibly some return to vendors, a little markdown support.

They went through this, what was it -- two years ago for holiday where we were probably over aggressive in our buys.

We went into the recession and when the team said, we need to hit an inventory target by the end of holiday that is sensible for us, let's figure out what we can do, they in fact overshot the mark.

And so there is lots of opportunities for our team to find ways to work their inventory down.

And that leaves us pretty confident that they can be a little more aggressive and still come out okay.

All right, guys.

Best of luck.

Thank you.

Jill Caruthers, Johnson Rice.

Could you address the (inaudible) and upside you saw in the second quarter that you (inaudible) to the annual guidance?

Could you talk about the figures variance there versus your internal plan?

I'm sorry, you cracked at a little bit.

Can you try that again?

And how are things down there?

Still have power surprisingly, but we are doing okay.

Sorry about the bad connection.

Just wondering about the 18% upside versus your internal plan in the second quarter.

What was the biggest I guess surprise for you versus your internal plan?

It really was -- sales were a little higher than we had anticipated, but we picked up a little bit in gross margin; gross margin came a little bit better than we had anticipated and then the biggest pickup was leverage, we leveraged more than we had anticipated.

So it was mostly leverage but a little bit of gross margin and also some additional sales.

Okay.

And then just last question just to follow up on the Lids question with the new NFL vendor products and whatnot.

Could you remind us how big that category is for you at the Lids and Locker Room divisions?

I'd appreciate that.

It is a business -- I will give you the color and I don't know if we have that number.

But it kicks in in September in a bigger way and then it grows right through December, it gets bigger every month, that is our headwear experience.

We are newer in the Locker Room business and we are very fortunate to have the Jets as a partner so we've got exposure there as well.

So I don't know the total -- the percent to total.

It just becomes a -- it's a very seasonal business and it is very important in those really four months.

The hat business, it was probably somewhere high single digits sneaking into low double digits, in that range.

It is big but it doesn't take over the store.

And that is in hats.

Appreciate it.

Thank you.

Chris Svezia, Susquehanna Financial Group.

Just to go back to the prior question, when you talk about high single to low double digits in hats, is that just for that -- that is just for that period of time, correct, in that fourth-quarter?

It's for the -- we are talking about the third and fourth quarters.

Okay.

And then I guess, Bob, a question for you.

When you think about how the NFL was assorted in hats last year given Reebok getting out of the business, just how do you think about it this year in terms of how product is assorted?

I mean if you are talking also pricing up 35%, how are you thinking about units as well?

I know you don't plan to a unit number, but just some thoughts about assortments and maybe some thoughts about units as well in the back half.

Yes.

Consistent with what we do at Journeys, we are not going to show our whole hand on how we are playing out the category.

But suffice to say that we are playing it up because when you have a price increase of that amount it's hard not to.

At the same time -- because we are expecting some elasticity of demand.

If we end up taking price up by a third and we get the same unit sales we will be delighted, but it is a little hard to bank on that.

So we are not going for the whole amount but we are certainly going up.

Sorry, I just don't really feel like we should be more specific than that.

Okay, fair enough.

And then just, Jim, a question for you.

When you -- I think you made a comment about third-quarter and if I caught it correctly you mentioned looking at consensus you thought it was too high.

And I'm just curious in what context if you had any color.

I mean you talked about the ability, if you do a 4% comp it seems like you would still get some leverage in the business.

I am just kind of curious if you had any color about that thought process there?

I think that -- we do expect to get some leverage in the business.

And if you look at -- one way of looking at it is look at on a comp basis I think our increase last year in the third quarter was greater than our fourth quarter.

So I think the amount that we have got to increase this year we just don't -- we base it on the numbers that are out there right now.

Based on the increase we saw last year I just think it is a little weighted -- the overall back half is a little weighted too heavily in the third quarter.

We get most of our -- get the sales increase, the benefits from the leverage in the fourth quarter and we've got some additional expenses, increased expenses this year in the third quarter that we didn't have last year which is the contingent bonus accrual for the Schuh business which will impact us in the third quarter.

There's a bunch of things going on and it's not a dramatic difference, but it's just -- looking at the numbers I just think you guys were a little high in the third quarter when you factor all that in.

Okay, fair enough.

And then last question I have is just on -- going back to the Lids business one last time.

When you look at the leveragability of that business, a 2% comp, and I don't know the exact number, but you got some nice leverage out of it.

Is that -- how sustainable is that at a 2% comp?

Or is there anything unusual going on?

Maybe talk about anything that you are doing internal in terms of the business or processes that is driving better leverage out of the business at a 2% comp?

Well, I will start and I will hand it to Jim.

Remember we are also adding square footage.

So leverage comes both at the store level -- comp leverages, store expenses and central expenses.

And then you've got square footage which leverages central expenses.

So you think about our model you've got a core machine, you've got a core distribution center, you've got a core group of buyers and we are able to grow square footage at a rate higher than we have to grow that part of SG&A.

So that is one point of leverage.

Jim?

Chris, this is really nothing new for Lids in that I remember when we bought them in 2004 and we were talking about -- the Lids team felt that they could leverage 2% to 3% and it really has been consistent since then.

We have always felt that, it is nothing different.

Just based on their business model, the size of the stores they seem to have the ability -- they have had the ability to comp in the 2% to 3% range and certainly around even 2%, 2.5% they have been able to comp.

So it's nothing new, it is just the model and it has worked consistently.

Okay.

All right, well all the best and congratulations.

Robin Murchison, SunTrust.

When you -- Bob, this is for you.

So when you look at the third-quarter retail landscape what gives you the confidence that it is just a late back to school?

It seems like we have heard that from everybody this quarter, or at least on the second quarter calls.

So first, it's just a slowdown or a more cautious back-to-school.

And I recognize your quarter to date comp is pretty strong and it sounds like you kind of only recently got there.

But can you just comment on the environment?

Yes, I think you just summarized it.

We saw a growing back-to-school over the course of the month, we were very pleased to see that, we think we are getting possibly more than our fair share so to speak, so share of wallet because the footwear category is so important to the teenager right now.

And so -- I'm not sure I understand the question.

August was strong, we finished with momentum, we are a little cautious about the rest of the way because this pattern we have seen in the past, when the retail landscape gets difficult we do best in the event periods and we soften in the other periods, so we are alert to that.

But we are pretty pleased with our trend.

Fair enough, thanks.

Scott Krasik, BB&T Capital Markets.

Just a couple quick ones.

With the double-digit comp at Shi in the first half of the year how close are you to achieving hurdle rates to really grow that business?

Closer but not there yet.

Okay, like another couple quarters and we are there or -- it's just (multiple speakers)?

There are a lot of factors to consider, Scott.

It is what the comp is, can we sustain it and we have to really think about what is getting us there and is that sustainable.

So we are very excited about it, the team is doing a great job.

We are delighted with the results, but we are not ready to commit to an expansion yet.

Okay.

And then you called out the ASP lift starting in Q4 last year.

Do you expect to return to declining ASPs or should they just flatten out from here?

What are the puts and takes?

Well, there is a bunch of factors, right.

So there is a mix and there is absolute price.

And the cost pressures in China haven't gone away completely, they have mitigated a whole lot.

So we are expecting that maybe not this year, but if you think longer-term there will continue to be some pressure on absolute prices, which would flow through to the consumer, which would drive ASPs up.

And then there is mix, and mix is the wild card.

And that just depends on what the kids choose to buy.

Our ASPs, as you know, fluctuate a lot by quarter, they are higher in the fourth quarter because the boot business kicks in.

But in terms of the change quarter over quarter it's just been historically hard for us to predict.

And as I said before, we don't buy to that, we buy to what the kids want and ASPs are derivative, we buy to a dollar number.

So if we do business with more units or less units the kids will tell us, we prefer higher ASPs, operationally it is an easier business to run for us, but we will do what it takes to serve the customer.

How -- I know when you had soccer slides and flip-flops growing that that really impacted you.

How do the next few quarters look after we get through this boot period?

On ASPs?

For mix, yes.

Yes, again, we don't -- people find this hard to believe, we don't do the math.

I could -- I guess we could go back and look at the total buy plan if someone wanted to go through the effort and say what is the derivative ASP once you look at everything we have bought in terms of units and what are target prices.

But we don't go through that exercise.

I guess it is more a fashion question.

Are you gearing up more towards closed toe, more expensive footwear or is open toe lower price point footwear the outlook?

And as you know, we are not going to comment on forward trends and how we are buying.

Okay, I tried.

Thanks.

Stephanie Wissink, Piper Jaffray.

Just one follow up on your long-term 2016 outlook.

If you could just help us, Jim, think about the mix between gross margin and operating expenses, how you are thinking about the relationship between those two margin items?

Thanks.

Yes, we have been pretty consistent in saying that in our five year plans that opportunity for us is mostly in SG&A leverage.

There could be some upside in the gross margin.

We feel our gross margins for each of our businesses are already pretty strong.

So really the opportunity is to leverage SG&A and that is the main driver getting us from 7% last year to an FY'16 operating margin of 9%, which has been -- a couple years ago we were at 5.5%, 7% last year and if you look at the numbers the driver was a leverage and we expect to get leverage going forward.

Okay, thanks, Jim.

I appreciate it.

That looks like all the time that we have for questions.

I will turn the conference back over to the speakers for any additional or closing remarks.

Appreciate you all joining us for our call and we will see you in three months.

Thank you, everybody.

Ladies and gentlemen, that does conclude today's conference.

We thank you for your participation and have a great day.

Thank you.